The
Supreme Court today held that (1) an insurer who both administers and funds
an Employee Retirement Income Security Act (ERISA) benefits plan operates
under a conflict of interest; and (2) courts should consider that conflict
of interest when reviewing a conflicted insurer's denial of benefits, but
should give the conflict varying weight based on the circumstances of the
case. The decision preserves deferential review for denials of benefits by
conflicted insurers but it gives the lower courts wide latitude in deciding
how much weight to give the conflict of interest in any particular case. The
decision also provides a roadmap for how plan administrators—both employers
that administer their own ERISA plans and insurance companies that
administer plans for employers—can preserve deferential review in the
courts.

In
Metropolitan Life Insurance Co. v. Glenn, the plaintiff had been denied
long-term disability benefits under a plan sponsored by her employer, Sears,
and administered and insured by MetLife. The district court affirmed
MetLife's denial of benefits. The Sixth Circuit, however, reversed. It held
that MetLife’s dual role—as administrator and funder of the plan—created an
"apparent conflict of interest" that was one of several factors supporting
its conclusion that the denial of benefits was unreasonable.

In an
opinion by Justice Breyer, the Supreme Court affirmed. First, the Court held
unanimously that an insurer who both administers and funds an ERISA benefits
plan operates under an actual, and not merely potential, conflict of
interest. Second, and with the support of six justices, the Court held that
when a court reviews a denial of benefits by a conflicted insurer, the
reviewing court should weigh the conflict "as a factor" of varying
significance "depend[ing] upon the circumstances of the particular case." In
lieu of giving "a detailed set of instructions" to lower courts, the Court
stuck to broad themes: review of a conflicted insurer's denial of benefits
should still be deferential, the presence of a conflict of interest is part
of "the combination-of-factors" a court should consider, how it does so
depends on the circumstances, and the significance of a conflict may be
reduced "where the administrator has taken active steps to reduce potential
bias and to promote accuracy."

Four
justices wrote or joined opinions agreeing in part with the majority.
Justice Kennedy, concurring in part and dissenting in part, agreed with both
of the Court's holdings but would have remanded for consideration under the
new standard. Three justices—Chief Justice Roberts, Justice Scalia, and
Justice Thomas—agreed with the Court's first holding but would not have
considered the conflict of interest without evidence that it actually
motivated the denial of benefits. These three justices divided on what
should be the disposition of the case: the Chief Justice, writing for
himself, would have affirmed because the denial of benefits was unreasonable
on other grounds; Justice Scalia, writing for himself and Justice Thomas,
would have remanded for consideration of whether the denial of benefits was
reasonable without regard to the conflict of interest.

The
Court's decision today is significant for four reasons. First, it resolved a
deep split among the courts of appeals about how to review decisions by an
insurer who administers and funds an ERISA benefits plan and did so by
encouraging courts to take into account an insurer's conflict of interest.
Second, it clarified that benefit denials by conflicted decisionmakers are
still entitled to deference—a partial win for employers and insurers that
otherwise would have faced de novo review of most of their denials
of benefits under ERISA plans. Third, in dicta the Court indicated
that employers who fund and administer their own plans also operate under a
conflict of interest. Fourth, and of great significance for litigation going
forward, the Court offered a roadmap for how a conflicted decisionmaker
could lessen the significance of its conflict of interest. The Court said
that a conflict of interest "should prove less important (perhaps to the
vanishing point) where the administrator has taken active steps to reduce
potential bias and to promote accuracy." As examples, the Court mentioned
"walling off claims administrators from those interested in firm finances"
and "imposing management checks that penalize inaccurate decisionmaking
irrespective of whom the inaccuracy benefits.”

The
Supreme Court today held that Federal labor law preempts states from
imposing restrictions on the use of state funds to effectively regulate
employer speech concerning union organization. The decision affirms the
right of employers, including those who receive state funds, to exercise
their noncoercive speech rights on labor matters, consistent with the
National Labor Relations Act.

A
California statute, enacted in 2000, prohibited private employers receiving
state grants (of any amount) or state program funds (in excess of $10,000
per annum) from using that money "to assist, promote, or deter union
organizing." The Court, in an opinion by Justice Stevens, held that these
provisions were preempted under the principles of Machinists v.
Wisconsin Employment Relations Commission, 427 U.S. 132 (1976), because
they restricted conduct that Congress intended to leave unregulated. The
Court concluded that, with certain narrow exceptions, employers’ noncoercive
speech activity on the subject of union organizing is within “a zone
protected and reserved for market freedom,” finding within the text,
history, and structure of the NLRA a congressional policy “favoring
uninhibited, robust, and wide-open debate” on labor disputes.

The Court
rejected California’s suggestion that the regulations were merely
permissible restrictions on the use of state funds, concluding instead that
the restrictions amounted to an impermissible attempt to indirectly regulate
and curb protected conduct. In so doing, the Court reemphasized previous
indications that, in the context of NLRA preemption, the appropriate
consideration is the activity a state seeks to regulate, rather
than the form of regulation it chooses to adopt.

Under the
Age Discrimination in Employment Act (ADEA or Act), 29 U.S.C. § 621 et
seq., there is an exemption for employer actions “otherwise prohibited”
by the Act that are “based on reasonable factors other than age.” 29 U.S.C.
§ 623(f)(1). The Supreme Court today held that an employer facing a
disparate-impact claim under the ADEA bears both the burden of production
and the burden of persuasion for the “reasonable factors other than age” (RFOA)
defense. The decision in the case is a significant one. As the Court itself
recognized, the decision “makes it harder and costlier” for employers to
defend against ADEA disparate-impact claims than if they “merely bore the
burden of production.” Slip op. 16.

In an
effort to reduce its work force, respondent Knolls Atomic Power Laboratory
(Knolls) instructed its managers to score their subordinates on
“performance,” “flexibility,” and “critical skills.” On the basis of these
scores, in addition to points for years of service, Knolls determined which
employees to lay off. Nearly all of the employees laid off were at least 40
years old. Petitioners, who were among those laid off, brought suit
asserting a disparate-impact claim under the ADEA. The jury returned a
verdict in favor of petitioners, but the Second Circuit reversed, holding
that they had failed to carry their burden of persuasion as to the
reasonableness of the factors relied upon by Knolls.

In an
opinion by Justice Souter, the Supreme Court vacated the Second Circuit’s
decision. The Court reasoned that the structure of the ADEA—which includes
general prohibitions on age discrimination and then sets forth exemptions to
those prohibitions in a separate provision (Section 623(f))—indicates that
the RFOA exemption establishes an affirmative defense. The Court found that
conclusion confirmed by its prior cases holding that the exemption for bona
fide occupational qualifications, which appears beside the RFOA exemption in
the statute, is an affirmative defense. Traditionally, the burden of proof
for affirmative defenses is on the party asserting the defense, and the
Court refused to deviate from that convention absent “compelling reasons to
think that Congress meant to put the burden of persuasion on the other
side.” Slip op. 6. In so holding, the Court reaffirmed that the
business-necessity test does not apply to ADEA disparate-impact suits.

At the
conclusion of its opinion, the Court made clear that the plaintiff in an
ADEA disparate-impact case is required to identify the specific employment
practice that is allegedly responsible for the impermissible disparate
impact. Noting that this “is not a trivial burden,” the Court sought to
reassure employers that its decision would not “encourage strike suits or
nudge plaintiffs with marginal cases into court.” Slip op. 16.

Justice
Scalia concurred in the judgment. He would have vacated the Second Circuit’s
decision on the ground that Congress placed the issues before the Court in
the hands of the Equal Employment Opportunity Commission, which, in his
view, resolved those issues reasonably. Justice Thomas concurred in part and
dissented in part. He agreed with the Court that RFOA is an affirmative
defense but would have affirmed the decision below on the ground that
disparate-impact claims are not cognizable under the ADEA. Justice Breyer
did not participate.

The
Supreme Court today held that, when an employer adopts a pension plan that
includes the employee’s age as a factor and treats employees differently
based on their pension status, a plaintiff alleging disparate treatment
under the Age Discrimination in Employment Act (ADEA or Act), 29 U.S.C. §
621 et seq., “must adduce sufficient evidence to show that the
differential treatment was ‘actually motivated’ by age, not pension
status.” Slip op. 11. This is an important decision for employers with
pension plans that take age into account in determining benefits.

Under
Kentucky’s pension plan (Plan), “hazardous position” workers (including
policemen and firemen) receive “normal retirement” benefits after either
working 20 years or working 5 years and reaching the age of 55. The Plan
calculates “normal retirement” benefits on the basis of the employee’s final
salary and years of service. The Plan also pays “disability retirement”
benefits to workers who become seriously disabled but have not otherwise
become eligible for “normal retirement.” In calculating “disability
retirement” benefits, the Plan adds to an employee’s actual years of service
the number of years the employee would have had to work to become eligible
for “normal retirement” benefits.

Charles
Lickteig, a worker covered by the Plan, became disabled at the age of 61,
with 18 years of service. Because he became disabled after having already
become eligible for “normal retirement” benefits, the Plan did not impute
any additional years in calculating his annual pension. Had Lickteig become
disabled before reaching the age of 55, additional years would have been
imputed. The Equal Employment Opportunity Commission filed suit, alleging a
violation of the ADEA. The district court granted summary judgment for the
defendants, but the en banc Sixth Circuit reversed.

In an
opinion by Justice Breyer, the Supreme Court reversed. The Court held that
the Plan did not violate the ADEA because (1) under the holding of Hazen
Paper Co. v. Biggins, 507 U.S. 604 (1993), age and pension status are
“analytically distinct” concepts; (2) there is no evidence that the Plan
used pension status as a proxy for age; (3) the Plan had a clear
non-age-related rationale and age factors into the “disability retirement”
calculation only because the “normal retirement” rules permissibly consider
age; (4) the Plan did not uniformly disadvantage older employees; (5) the
Plan did not rely on any pernicious stereotypes about older workers; and (6)
finding the Plan unlawful would leave Kentucky with no clear criteria for
determining how many extra years to impute for workers who become disabled
at age 55 or older.

In a
dissenting opinion joined by Justices Scalia, Ginsburg, and Alito, Justice
Kennedy argued that, under a straightforward interpretation of the ADEA, the
“use of age in a formal, facial, deliberate and explicit manner, to the
detriment of older employees,” violates the Act. Slip op. 1 (dissenting
opinion).

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